Introduction
This report seeks to clarify the rationale for regulation and supervision of banks in the United Kingdom. Section one will give an insight on the regulatory system in the UK. Section two focuses on the gains and the drawbacks of the regulatory system in UK. The last section explores potential alternative systems of regulation.
Section 1
The Regulatory system of the UK
Regulation relates to the setting of specific rules of behaviour that firms have to abide by. Here, it involves directing, governing or controlling the banking system. This can be achieved through legislation (laws) or in this case by a regulatory agency (or agencies), the Financial Services Authority in the UK- a sole authority of regulation (CASU, BARBARA and GIRARDONE, CLAUDIA and MOLYNEUX, PHILIP, 2006, p.161).
Supervision relates to general governing. It does not essentially mean direct but management of the behaviour of financial firms (CASU, BARBARA and GIRARDONE, CLAUDIA and MOLYNEUX, PHILIP, 2006, p.161).
The history, emergence and rationale for regulation
The regulation and supervision of banks of in general may be deemed a controversial issue. Banks play a vital role in financial intermediation through - diversification of risks, reducing transaction costs, adverse selection and information asymmetries. They link firms and the financial sector which encourages growth. Financial systems are prone to periods of instability.
In recent times, a number of financial crises around the world (South-East Asia, Latin America and Russia) have brought about a large number of bank failures. These crises may have been a failure of regulation.
Banks retain only a fraction of their deposits as cash and the remainder is issued as loans.
This ...